Severance packages must go beyond salary loss to keep employee whole

July 7, 2006

Print

Typically when employers or employees look at assessing the appropriateness of severance packages, both parties often focus on the salary loss during the notice period. However it is important that both employees and employers not ignore the value of other benefits and don't lose sight of the overall obligation that terminated employees be kept whole for all associated losses during the notice period. Two recent court decisions have emphasized the importance of looking at all aspects of severance packages from the perspective of keeping an employee whole.

Employees entitled to damages for loss of pension benefits

In Taggart v. The Canada Life Assurance Co. [2006] O.J. No. 310, the Court of Appeal confirmed that employers are liable for loss of pension benefits during the reasonable notice period. Taggart involved the termination of a 30-year employee who was let go shortly after Canada Life was purchased by another insurance company. The employee was provided with a 24-month notice period severance offer, which consisted of two months working notice and a 22 months’ pay in lieu of notice. However, his pensionable service and credits were only continued for the two month working notice period.

Canada Life refused to provide Taggart with anything for loss of pension growth over the remaining 22 months. Credit for the 22-month period would have provided Taggart with more than 30 years of pensionable service and entitled him to an unreduced pension. As a result, Taggart refused to accept the severance package and commenced an action. All issues were resolved prior to trial except for the pension claim. Canada Life argued that terms of the pension plan only allowed accrual of pensionable service during active employment. Both the trial judge and the Court of Appeal rejected this position. The Court of Appeal stated that in approaching the issue it was first necessary to consider Taggart's common law rights to damages for breach of contract over the notice period and then to consider whether the terms of the pension plans alter or remove that common law right. The court expressly found that Taggart was entitled at common law to be kept whole throughout the notice period and as such was entitled to receive damages for the loss of pension benefits that would have accrued over that time. Furthermore, the court noted that because pension plans are unilateral contracts in nature, in order to remove the entitlement to pension losses during the notice period, the plan requires clear and unequivocal language that expressly removes the entitlement before a court will disallow damages for pension loss. The court found that the language of the pension plans in question was at best ambiguous and therefore Taggart was entitled receive damages for the loss of pension benefits.

Disability benefits and double recovery

In the May 18 issue of The Lawyers Weekly, my colleague Ainslie Benedict looked at the Court of Appeal's recent decision in Egan v. Alcatel [2006] O.J. No. 34 which confirmed that employers will be liable for lost disability benefits during the reasonable notice period and highlighted the potential exposure of employers for damages should an employee become disabled during the notice period. However, the Court of Appeal in Egan did not squarely deal with the issue of deductibility of LTD and STD payments from damages owing for reasonable notice. This latter issue was addressed recently in Fedorowicz v. Pace Motor Lines Inc. [2006] O.J. No. 344 (S.C.), where Justice John Sproat ruled that payments for disability benefits were not deductible from notice damages.

What is interesting is that Justice Sproat in coming to this conclusion stated that he approached this issue from the common sense proposition that disability benefits and severance payments serve two completely different purposes. He then noted that two earlier Court of Appeal rulings had effectively limited the application of the Supreme Court’s decision in the Sylvester, which had allowed the deductibility of disability benefits against notice damages on the basis of double recovery, to its precise facts. Effectively, Justice Sproat found that Sylvester is distinguishable and disability benefits will not be deductible, if any of the following factors are present:

the insurer pays disability payments, which is the norm in most employment relationships. This fact in and of itself is sufficient to distinguish Sylvester and eliminate the double recovery argument.

If there is evidence that the employee provided payment or consideration for the disability benefits, which could include evidence from the employee that they would not have accepted the salary offered if benefits had not been included. In other words the employee took less salary in return for benefits.

If there is contract language or evidence as to the intention of the parties that indicates disability benefits should not be deducted.

Finally and most broadly, if the contract is silent, Sylvester is distinguishable such that it is necessary to infer the intention of the parties. Justice Sproat noted that the common sense proposition that disability benefits and severance payments serve two completely different purposes leads to the conclusion that reasonable parties would have readily agreed that disability benefits would not be deductible.

Justice Sproat concluded on this issue by saying: "It is therefore, difficult to envision a case with facts not identical to Sylvester, in which a court could conclude that disability benefits should be deducted from wrongful dismissal damages". While the decision of Justice Sproat will not likely end the debate regarding double recovery and the deductibility of disability benefits, it is an important salvo in that debate and invites further consideration of the issue by appellate courts to determine the limits of deductibility.

Bottom line

It is clear that depending on such factors as the seriousness of an employee’s disability and the length of service with the employer, that damages for loss of disability benefits and pension may be far greater than damages for lost salary. Employee counsel will want to closely examine severance packages provided to employees to ensure that pension and disability issues are adequately addressed. Employers who want to avoid or limit damages for disability benefits and pension losses over the notice period will need to ensure that they have binding employment contracts in place with clear and unequivocal language that expressly extinguishes the common law right to those damages.

Steve Levitt practises employment law with Nelligan O'Brien Payne LLP, a full service law firm, in Ottawa.

[This article is reprinted with permission and first appeared in the July 2006 issue of The Lawyers Weekly.]